North Korea - Economic Development

Economic development

North Korea's reliance on a command economy has led to an inward-looking development strategy, demonstrated in policies on domestic industrial development, foreign trade, foreign capital, imported technology, and other forms of international economic cooperation. Priority is assigned to establishing a selfsufficient industrial base. Consumer goods are produced primarily to satisfy domestic demand, and private consumption is held to low levels. This approach is in sharp contrast to South Korea's outward-oriented strategy begun in the mid-1960s, which started with light industry in order to meet the demands of growing domestic and foreign markets and export expansion.

As a consequence of the government's policy of establishing economic self-sufficiency, the North Korean economy has become increasingly isolated from that of the rest of the world, and its industrial development and structure do not reflect its international competitiveness. Domestic firms are shielded from international as well as domestic competition; the result is chronic inefficiency, poor quality, limited product diversity, and underutilization of plants. This protectionism also limits the size of the market for North Korean producers, which, in turn, prevents them from taking advantage of economies of scale.

Beginning in the mid-1980s, and particularly around the end of the decade, North Korea began slowly to modify its rigid selfreliant policy. The changes, popularly identified as the opendoor policy, included an increasing emphasis on foreign trade, a readiness to accept direct foreign investment by enacting a joint venture law, the decision to open the country to international tourism, and economic cooperation with South Korea.

Postwar Economic Planning

During what North Korea called the "peaceful construction" period before the Korean War, the fundamental task of the economy was to overtake the level of output and efficiency attained toward the end of the Japanese occupation; to restructure and develop a viable economy reoriented toward the communist-bloc countries; and to begin the process of socializing the economy. Nationalization of key industrial enterprises and land reform, both of which were carried out in 1946, laid the groundwork for two successive one-year plans in 1947 and 1948, respectively, and the Two-Year Plan of 1949-50. It was during this period that the piece-rate wage system and the independent accounting system began to be applied and that the commercial network increasingly came under state and cooperative ownership.

The basic goal of the Three-Year Plan, officially named the Three-Year Post-war Reconstruction Plan of 1954-56, was to reconstruct an economy torn by the Korean War. The plan stressed more than merely regaining the prewar output levels. The Soviet Union, China, and East European countries provided reconstruction assistance. The highest priority was developing heavy industry, but an earnest effort to collectivize farming also was begun. At the end of 1957, output of most industrial commodities had returned to 1949 levels, except for a few items such as chemical fertilizers, carbides, and sulfuric acid, whose recovery took longer.

Having basically completed the task of reconstruction, the state planned to lay a solid foundation for industrialization while completing the socialization process and solving the basic problems of food and shelter during the Five-Year Plan of 1957- 60. The socialization process was completed by 1958 in all sectors of the economy, and the Ch'llima Movement (see Glossary) was introduced. Although growth rates reportedly were high, there were serious imbalances among the different economic sectors. Because rewards were given to individuals and enterprises that met production quotas, frantic efforts to fulfill plan targets in competition with other enterprises and industries caused disproportionate growth among various enterprises, between industry and agriculture and between light and heavy industries. Because resources were limited and the transportation system suffered bottlenecks, resources were diverted to politically well-connected enterprises or those whose managers complained the loudest. An enterprise or industry that performed better than others often did so at the expense of others. Such disruptions intensified as the target year of the plan approached.

Until the 1960s, North Korea's economy grew much faster than South Korea's. Although P'yongyang was behind in total national output, it was ahead of Seoul in per capita national output, because of its smaller population relative to South Korea. For example, in 1960 North Korea's population was slightly over 10 million persons, while South Korea's population was almost 25 million persons. Phenomenal annual economic growth rates of 30 percent and 21 percent during the Three-Year Plan of 1954-56 and the Five-Year Plan of 1957-60, respectively, were reported. After claiming early fulfillment of the Five-Year Plan in 1959, North Korea officially designated 1960 a "buffer year"--a year of adjustment to restore balances among sectors before the next plan became effective in 1961. Not surprisingly the same phenomenon recurred in subsequent plans. Because the Five-Year Plan was fulfilled early, it became a de facto four-year plan. Beginning in the early 1960s, however, P'yongyang's economic growth slowed until it was stagnant at the beginning of the 1990s.

Various factors explain the very high rate of economic development of the country in the 1950s and the general slowdown since the 1960s. During the reconstruction period after the Korean War, there were opportunities for extensive economic growth--attainable through the communist regime's ability to marshall idle resources and labor and to impose a low rate of consumption. This general pattern of initially high growth resulting in a high rate of capital formation was mirrored in other Soviet-type economies. Toward the end of the 1950s, as reconstruction work was completed and idle capacity began to diminish, the economy had to shift from the extensive to the intensive stage, where the simple communist discipline of marshalling underutilized resources became less effective. In the new stage, inefficiency arising from emerging bottlenecks led to diminishing returns. Further growth would only be attained by increasing efficiency and technological progress.

Beginning in the early 1960s, a series of serious bottlenecks began to impede development. Bottlenecks were pervasive and generally were created by the lack of arable land, skilled labor, energy, and transportation, and deficiencies in the extractive industries. Moreover, both land and marine transportation lacked modern equipment and modes of transportation. The inability of the energy and extractive industries as well as of the transportation network to supply power and raw materials as rapidly as the manufacturing plants could absorb them began to slow industrial growth.

The First Seven-Year Plan (initially 1961-67) built on the groundwork of the earlier plans but changed the focus of industrialization. Heavy industry, with the machine tool industry as its linchpin, was given continuing priority. During the plan, however, the economy experienced widespread slowdowns and reverses for the first time, in sharp contrast to the rapid and uninterrupted growth during previous plans. Disappointing performance forced the planners to extend the plan three more years, until 1970. During the last part of the de facto ten-year plan, emphasis shifted to pursuing parallel development of the economy and of defense capabilities. This shift was prompted by concern over the military takeover in South Korea by General Park Chung Hee (1961-79), escalation of the United States involvement in Vietnam, and the widening Sino-Soviet split. It was thought that stimulating a technological revolution in the munitions industry was one means to achieve these parallel goals. In the end, the necessity to divert resources to defense became the official explanation for the plan's failure.

The Six-Year Plan of 1971-76 followed immediately in 1971. In the aftermath of the poor performance of the preceding plan, growth targets of the Six-Year Plan were scaled down substantially. Because some of the proposed targets in the First Seven-Year Plan had not been attained even by 1970, the Six-Year Plan did not deviate much from its predecessor in basic goals. The Six-Year Plan placed more emphasis on technological advance, self-sufficiency in industrial raw materials, improving product quality, correcting imbalances among different sectors, and developing the power and extractive industries; the last of these had been deemed largely responsible for slowdowns during the First Seven-Year Plan. The plan called for attaining a self- sufficiency rate of 60 to 70 percent in all industrial sectors by substituting domestic raw materials wherever possible and by organizing and renovating technical processes to make the substitution feasible. Improving transport capacity was seen as one of the urgent tasks in accelerating economic development-- understandable since it was one of the major bottlenecks of the Six-Year Plan.

North Korea claimed to have fulfilled the Six-Year Plan by the end of August 1975, a full year and four months ahead of schedule. Under the circumstances, it was expected that the next plan would start without delay in 1976, a year early, as was the case when the First Seven-Year Plan was instituted in 1961. Even if the Six-Year Plan had been completed on schedule, the next plan should have started in 1977. However, it was not until nearly two years and four months later that the long-awaited plan was unveiled--1977 had become a "buffer year."

The inability of the planners to continuously formulate and institute economic plans reveals as much about the inefficacy of planning itself as the extent of the economic difficulties and administrative disruptions facing the country. For example, targets for successive plans have to be based on the accomplishments of preceding plans. If these targets are underfulfilled, all targets of the next plan--initially based on satisfaction of the plan--have to be reformulated and adjusted. Aside from underfulfillment of the targets, widespread disruptions and imbalances among various sectors of the economy further complicate plan formulation.

The basic thrust of the Second Seven-Year Plan (1978-84) was to achieve the three-pronged goals of self-reliance, modernization, and "scientification." Although the emphasis on self-reliance was not new, it had not previously been the explicit focus of an economic plan. This new emphasis might have been a reaction to mounting foreign debt originating from large- scale imports of Western machinery and equipment in the mid- 1970s. Through modernization North Korea hoped to increase mechanization and automation in all sectors of the economy. "Scientification" is a buzzword for the adoption of up-to-date production and management techniques. The specific objectives of the economic plan were to strengthen the fuel, energy, and resource bases of industry through priority development of the energy and extractive industries; to modernize industry; to substitute domestic resources for certain imported raw materials; to expand freight-carrying capacity in railroad, road, and marine transportation systems; to centralize and containerize the transportation system; and to accelerate a technical revolution in agriculture.

In order to meet the manpower and technology requirements of an expanding economy, the education sector also was targeted for improvements. The quality of the comprehensive eleven-year compulsory education system was to be enhanced to train more technicians and specialists, and to expand the training of specialists, particularly in the fields of fuel, mechanical, electronic, and automation engineering.

Successful fulfillment of the so-called nature-remaking projects also was part of the Second Seven-Year Plan. These projects referred to the five-point program for nature transformation unveiled by Kim Il Sung in 1976: completing the irrigation of non-paddy fields; reclaiming 100,000 hectares of new land; building 150,000 hectares to 200,000 hectares of terraced fields; carrying out afforestation and water conservation work; and reclaiming tidal land.

From all indications, the Second Seven-Year Plan was not successful. North Korea generally downplayed the accomplishments of the plan, and no other plan received less official fanfare. It was officially claimed that the economy had grown at an annual rate of 8.8 percent during the plan, somewhat below the planned rate of 9.6 percent. The reliability of this aggregate measure, however, is questionable. During the plan, the target annual output of 10 million tons of grains (cereals and pulses) was attained. However, by official admission, the targets of only five other commodities were fulfilled. Judging from the growth rates announced for some twelve industrial products, it is highly unlikely that the total industrial output increased at an average rate of 12.2 percent as claimed. After the plan concluded, there was no new economic plan for two years, indications of both the plan's failure and the severity of the economic and planning problems confronting the economy in the mid-1980s.

The main targets of the Third Seven-Year Plan of 1987-93 are to achieve the so-called "Ten Long-Range Major Goals of the 1980s for the Construction of the Socialist Economy". These goals, conceived in 1980, are to be fulfilled by the end of the decade. The fact that these targets are rolled over to the end of the Third Seven-Year Plan is another indication of the disappointing economic performance during the Second Seven-Year Plan. The three policy goals of self-reliance, modernization, and "scientification" were repeated. Economic growth was set at 7.9 percent annually, lower than the previous plan. Although achieving the ten major goals of the 1980s is the main thrust of the Third Seven-Year Plan, some substantial changes have been made in specific quantitative targets. For example, the target for the annual output of steel has been drastically reduced from 15 million tons to 10 millon tons. This reduction will have serious negative secondary effects on heavy industry. The output targets of cement and non-ferrous metals-- two major export items--have been increased significantly. The June 1989 introduction of the Three-Year Plan for Light Industry as part of the Third Seven-Year Plan is intended to boost the standard of living by addressing consumer needs.

The Third Seven-Year Plan gives a great deal of attention to developing foreign trade and joint ventures, the first time a plan has addressed these issues. By the end of 1991, however, two years before the termination of the plan, no quantitative plan targets had been made public, an indication that the plan has not fared well. The diversion of resources to build highways, theaters, hotels, airports, and other facilities in order to host the Thirteenth World Festival of Youth and Students in July 1989, must have had a negative impact on industrial and agricultural development, although the expansion and improvement of social infrastructure have resulted in some long-term economic benefits.

The shortage of foreign exchange because of a chronic trade deficit, a large foreign debt, and dwindling foreign aid has constrained economic development. In addition, North Korea has been diverting scarce resources from developmental projects to defense; it spent more than 20 percent of GNP on defense toward the end of the 1980s, a proportion among the highest in the world. These negative factors, compounded by the declining efficiency of the central planning system and the failure to modernize the economy, have slowed the pace of growth since the 1960s. The demise of the communist regimes in the Soviet Union and East European countries--North Korea's traditional trade partners and benefactors--has compounded the economic difficulties in the early 1990s.

Concomitant with the socialization of the economy and the growth in the total magnitude of national output has been a dramatic and revealing change in the relative share of output, indicating that the economy has been transformed from being primarily agricultural to primarily industrial. Whereas in 1946, industrial and agricultural outputs were 16.8 percent and 63.5 percent, respectively, of total national output, the relative position has reversed fundamentally since then so that the respective shares in 1970 were 57.3 percent and 21.5 percent. Judging from the agricultural share of 24 percent in 1981, there were slight reverses in the relative composition in the 1970s.

Growth and changes in the structure and ownership pattern of the economy also have changed the labor force. By 1958 individual private farmers, who once constituted more than 70 percent of the labor force, had been transformed into or replaced by state or collective farmers. Private artisans, merchants, and entrepreneurs had joined state or cooperative enterprises. In the industrial sector in 1963, the last year for which such data are available, there were 2,295 state enterprises and 642 cooperative enterprises. The size and importance of the state enterprises can be surmised by the fact that state enterprises, which constituted 78.1 percent of the total number of industrial enterprises, contributed 91.2 percent of total industrial output.

Record of Economic Performance

A lack of reliable data inhibits an accurate quantitative assessment of North Korea's economic performance. In mid-1993 North Korea remains one of the most secretive nations in the world, limiting the release of its economic data to the outside world and, for that matter, to its own population. Until about 1960, North Korea released economic data relatively more freely. Beginning in the 1960s, the publication of economic data began to dwindle dramatically; the withholding of information coincided with the beginning of the economy's slowdown.

The small amount of data that is published suffers from ambiguities and gaps and--more often than not--is in the form of percentages that do not provide base figures or explain the precise meaning of aggregated data. Moreover, North Korean macroeconomic aggregates such as national income, which is based on Marxist definitions, has to be modified in order to be comparable to customary Western standards. In the 1980s and early 1990s, only limited quantitative or qualitative information about the North Korean economy was available. Quantitative information on foreign trade is a welcome exception because the statistical returns from North Korea's trade partners are gathered by such international organizations as the United Nations (UN) and the International Monetary Fund (IMF), and South Korean organizations such as the National Unification Board.

Estimating gross national product (GNP) is a difficult task because of the dearth of economic data, the national income accounting procedures based on the Marxist definition of production, and the problem of choosing an appropriate rate of exchange for the wn-- the nonconvertible North Korean currency. The South Korean government's estimate placed North Korea's GNP in 1991 at US$22.9 billion, or US$1,038 per capita. This estimate of economic accomplishment pales next to South Korea's GNP of US$237.9 billion with a per capita income of US$5,569 that same year. North Korea's GNP in 1991 showed a 5.2 percent decline over 1989, and preliminary indications were that the decline would continue. In contrast, South Korea's GNP grew by 9.3 percent and 8.4 percent, respectively, in 1990 and 1991.

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